HAMISH MCRAE: Our ‘animal spirits’ must come back with a growl once Election and Brexit are done
Once the Election and Brexit are done, the great question facing the country will be how the economy will shape up through next year – and beyond.
The financial markets assume that Boris Johnson will get a majority, though maybe a much smaller one than that YouGov poll suggested, so let’s in turn assume they are right. If he doesn’t, then all bets are off.
Will the ‘animal spirits’ return? The economist John Maynard Keynes coined that phrase to describe that shift of mood when people want to go out and do something: spend money, buy a house, change their job, start a business. He called it ‘a spontaneous urge to action rather than inaction’ – or, put simply, just getting on with it.
Heading in the right direction?: The financial markets assume that Boris Johnson will get a majority in December’s Election
We need those spirits to come back. The economy has been pretty resilient, but there is lots of evidence that investment decisions have been postponed.
That has been a drag on growth. Just in the past few weeks the job market, which had been very strong, has weakened a bit. And retail sales? Not dreadful but not brilliant either.
If a returned Tory Government is to get the revenue to pay for its spending promises, it needs us to perk up.
It needs the tax revenue that more growth would deliver. Indeed, that is the only way it can hope to keep the budget deficit under control, for it has promised not to increase the rates of the three biggest taxes: income tax, VAT and National Insurance.
So what happens next year? My instinct is that there will indeed be a short-term bounce because people who have been dithering will get on with it. Sterling will climb. And UK shares, which have lagged behind other major markets, will close some of that gap. But for animal spirits to return with a throaty growl, we need three things.
One is the trade deal with Europe. It is very much in the self-interest of the EU to do one swiftly and on favourable terms, for they sell more to us than we sell to them. But Brussels bureaucracy is Brussels bureaucracy, and it may be difficult for it to do the deal by the end of the year.
The second is that the global economic background remains reasonably benign.
The US and China have to have a trade truce. Interest rates have to remain relatively low. There mustn’t be a market panic. And, of course, there mustn’t be a global recession.
And third, our next government has to get the detail right. Please no grandiose unfunded investment schemes. Please save money where you can. Please don’t fiddle about with the tax system. Please keep the door open to foreign talent and investment – no, don’t just keep it open…widen it, for if we try to shut off from the world we are in trouble. There, I suggest, lies the key to managing the country’s economy through the next five years.
We have had the longest expansion since the Second World War. We cannot assume that this will continue, but we may with luck get another year or two of decent global growth.
That is the time to start doing the mass of small, sensible things that will clear the way for the rest of us to get on with it.
And those things? We don’t need vision; we need common sense. So revise pension taxes so that people can build up enough savings to fund decent retirement. Invest in roads and charging points for electric vehicles. Take HS2 funds and spend them instead to improve the existing rail network. Ask business what it needs to invest more. Then we’ll do it.